Retailers turn to fee-based loyalty programs in bid to keep customers

From giant grocer Loblaw Cos. Ltd. to premium yoga fashion chain Lululemon Athletica Inc. and home-goods e-commerce specialist Wayfair Inc., retailers increasingly are charging customers a fee – from about $35 to $128 a year – to sign up for loyalty programs. In exchange, consumers get perks such as free shipping and access to exclusive products or events.

For retailers, it’s more than just about generating revenue from memberships. Companies feel the pressure in a digital world to entice shoppers who can easily switch loyalties after checking their mobile devices for a better deal elsewhere.

The rise of the paid loyalty program has taken shape in the shadow of e-commerce titan Amazon.com Inc., whose Prime paid subscription has become the gold standard, luring shoppers and pushing rivals to offer their own fee-based plans with free shipping and other perks.

“Companies are trying to lock people in and make it their primary program,” said Patrick Sojka, founder of Rewards Canada in Calgary which tracks loyalty programs. “Without the paid option people don’t have to be loyal.”

Twenty-six per cent of customers are willing to pay a fee for the convenience provided by a paid loyalty program and “a sense of status and affluence,” says a report this year by industry consultants Bond Brand Loyalty.

“Brands see the potential for a substantial revenue stream that affords them the opportunity to provide richer, more tailored and highly relevant content and experiences,” it says. Loyalty program members at vitamin retail giant GNC Holdings Inc. spend twice as much as other customers, it says.

For years, retailers such as Canadian Tire Corp. and Shoppers Drug Mart, now owned by Loblaw, have touted free rewards programs to win more business by tracking their best customers and personalizing offers to them.

Costco Wholesale Corp. has thrived by charging an annual fee for the privilege of shopping at its stores. But the Amazon Prime phenomenon has now forced competitors to rethink their loyalty programs.

Wayfair introduced its MyWay paid rewards program this fall, charging $34.99 in Canada for such things as free shipping and two-day delivery and discounts on installation and assembly services.

But although the programs boost customer loyalty, they also come at a cost for retailers.

“The reason we charge for it is because these programs do cost us money,” said Bob Sherwin, vice-president of marketing at Wayfair. “We needed to make sure there was some margin.”

About 66 per cent of Wayfair customers already are repeat purchasers, spending an average of US$443 a year on 1.84 purchases, he said. Wayfair’s initial goal is to convince 10 per cent to 20 per cent of its customers to sign up for MyWay, he said.

Loblaw this month expanded its PC Insiders loyalty program, which costs $99 a year or $9.99 a month, to all customers after testing it over the past year among some members of its 16 million PC Optimum free program.

The expanded PC Insiders program offers free e-commerce grocery order pickups, free shipping from its Shoppers Drug Mart and Joe Fresh shopping sites, a $99 credit with President’s Choice travel service bookings, and other perks. The pilot found that initial PC Insiders members on average received benefits that were more than twice the subscription fee, the company said.

Lululemon is testing a $128-a-year loyalty program in Edmonton and so far the response has exceeded the retailer’s expectations, chief executive Calvin McDonald said this month.

The program, which Lululemon will expand to a few more markets in 2019, offers a free pair of pants or shorts, access to “select” yoga and fitness classes and free expedited shipping of e-commerce orders, he said. “We actually feel we can increase the price.”

Meanwhile, Prime members spend an average of $1,400 a year at Amazon while non-members shell out just $600, estimates Consumer Intelligence Research Partners. It says Prime members with the longest tenure spend even more: Those with memberships of more than three years shell out $1,500 annually compared with $900 for the newest members.

At home furnishings retailer RH (previously called Restoration Hardware,) its paid loyalty program members in 2017 generated 95 per cent of its core business, the company reported this year. CEO Gary Friedman said the program is achieving its goal of limiting constant sales that bring customers to stores just for the markdowns, and now offers a membership model with perks such as designer consultations.

Even so, not all people who sign up for paid programs remain loyal over the long term, with some joining just to take advantage of one purchase. Mr. Sojka of Rewards Canada said he recently paid the $125 fee to become an RH loyalty program member because he wanted to buy a dining room set. He spent $6,100 on one, saving $1,800 through the RH program, but now doesn’t plan to renew his membership.